World’s cheapest oil is crimping Alberta’s budget as price gap soars

Alberta oil price gap crimps province's budget

Alberta, Canada’s wealthiest province, will issue more debt and dip into savings to overcome reduced revenue tied to the price gap between the oil it produces and world crude prices.

Alberta will probably borrow more this year, taking advantage of the province’s AAA rating and low interest rates, Finance Minister Doug Horner said in a Jan. 18 interview. The province will also tap its sustainability fund to help offset lower revenue from the world’s cheapest oil, he said.

“We’ll probably be going to the markets a little more this year,” Horner said in Calgary. There is “excitement” about the fact that “Alberta is entering some markets that we’ve not been in before,” he said, without elaborating.

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It is a strategic imperative, it is in Alberta’s interest, in Canada’s interest, that we get access to tidewater, whether that’s east, north or west, to diversify away from the single continental market and be part of the global market

Alberta relies on royalties and taxation of the oil and natural gas industry for almost one-third of its revenue. A 35% drop over the past four months for the price of Western Canada Select, the benchmark Canadian crude that averaged US$71.80 last year, has widened the gap relative to world oil prices and forced Horner’s government to find ways to make up for the shortfall. The finance ministry predicted Canadian crude price of $83.28 for the fiscal year that began in April.

“The reality is that we should be trading on par with Mayan crude at about US$94 a barrel,” said Horner. “That has an enormous impact of the province’s finances and every province in Canada’s finances as well as the Canadian government.”

The fiscal 2013-2014 budget will be made public on March 7, Horner said.

Making Investments

With Irving, Texas-based Exxon Mobil Corp., Calgary’s Suncor Energy Inc. and rivals making investments expected to be worth about $23 billion this year, the province’s energy sector is attracting job seekers and boosting a population forecast to reach 5 million in the coming two decades from 3.7 million now. To keep up with growth, Premier Alison Redford’s Progressive Conservatives promised in last year’s election campaign to spend almost $4 billion on 50 new schools, 140 medical clinics and post-secondary education, a pledge based on growing oil sands royalties.

The volume of debt issued will depend on the government’s plans for infrastructure, Horner said. The ministry expects about $5 billion to $6 billion in infrastructure investments annually in the coming years, he said.

The lower revenue means “tax increases are going to have to come,” said George Gosbee, chairman of Calgary-based investment-banking company AltaCorp Capital Inc. in a Jan. 17 phone interview. “This is going to be a tough political decision.”

Largest Gap

Western Canada Select traded $42.50 a barrel less than U.S. crude on Dec. 14, the most since Bloomberg began keeping records. Canadian companies are forgoing about $2.5 billion a month because of the lower prices, according to an estimate by Houston-based investment bank PPHB Securities LP.

“There’s no question that there’s concern about the price differential, but it’s not a factor that’s having an impact on business right now,” said John Beck, chief executive officer of Aecon Group Inc., a construction and engineering company, in a Jan. 16 interview. “There’s cautious optimism right now.”

If TransCanada Corp.’s Keystone XL pipeline to the Gulf Coast were approved, that would be “an important step” to connect Alberta to international markets and help reduce the discount for Western Canada Select, said Ken Hughes, Alberta’s energy minister who also participated in the Jan. 18 interview.

“It is a strategic imperative, it is in Alberta’s interest, in Canada’s interest, that we get access to tidewater, whether that’s east, north or west, to diversify away from the single continental market and be part of the global market,” Hughes said.

Outstanding Bonds

“This is not something we’re going to solve in a year or two,” the minister said. “It might resolve itself over a three- to five-year period.”

The western province has $16.2 billion in outstanding bonds, according to data compiled by Bloomberg, with about $3.3 billion of that due in 2013. Alberta’s debt is rated AAA, the highest level, by Standard & Poor’s.

While the province’s “continuing deficits have not translated into an increase in debt and debt burdens, Alberta’s cash and investment holdings have been declining,” wrote S&P credit analyst Stephen Ogilvie in an Oct. 25 report.

The so-called fiscal stabilization fund that the government uses to manage the budget was worth about $7.5 billion as of March 31, 2012, down from $15.0 billion two years earlier, S&P said.

‘Incremental Improvements’

“By this time next year, the differential should have shrunk significantly because of the Seaway pipeline, the southern leg of Keystone and other ongoing incremental improvements to the North American pipeline systems,” said Michael Tims, chairman of Calgary-based investment bank Peters & Co., in a Jan. 18 interview.

“The province is in a period of considerably lower natural gas revenues, while rising oil sands revenues are still ramping up. At the same time, the population and economy are growing, and this creates a challenge for budgeting,” Tims said.

There are no plans to raise taxes, or impose a sales tax, Horner said. The province will instead use more debt and attract sovereign wealth funds to invest in public-private infrastructure projects, the finance minister said.

“We are going to use all the tools in our toolbox,” he said. “Does that mean we will go to the markets? Yes.”